In our third installment on how blockchain technology is reshaping our world (while creating new ones), we examine the surging interest in non-fungible tokens (NFTs).
The idea that owners of goods should be able to possess, use, sell, lease, or transfer ownership rights is part of the bedrock of capitalism. Obviously, no profit-seeking enterprise would risk time and money developing a drug (or a painting, or a software program, etc.) if there was no way to benefit from the investment ultimately. During the early years of the internet, it was very difficult to establish and maintain ownership of anything. Over time, security was vastly improved, but blockchain establishes complete security for owners of digital works. Today, we will examine how blockchain technology is creating a new industry by making secure sales of digital assets possible.
What Is a Non-Fungible Token?
A non-fungible token is a unique digital asset often representing assets existing in the real world – art, music, video content, sports highlights (and more) can all be sold as NFTs. Blockchain provides people with the means to establish unassailable ownership of digital works, so (for example) a video clip of Kobe Bryant dunking a basketball can be owned by a single person or entity. This ability to assert ownership through an NFT also creates digital scarcity, and scarcity tends to support the value of any asset. The NFT market is still in its infancy, with the first sale occurring just eight years ago. As the adoption of blockchain made digital ownership safe and secure, transactions surged. Data tell the story – sales of NFTs increased dramatically from $82.5 million in 2020 to $17.6 billion last year, with the majority occurring in the Metaverse and Gaming categories, as shown in the graphic2. Although past performance is no guarantee of future results, this 21,000+ percent growth would never have happened if security was a concern.
Guaranteed Virtual Ownership
As noted earlier in our Built on Blockchain series, everyone in the real world wants to protect what they own and want to keep. We build fences, lock doors, and install alarms of different types to keep the bad guys out. Not too many years ago, it was (grudgingly) accepted that anything placed online was as good as gone – it would be copied, reused, and resold, with no recourse for the original owner. Different security strategies were developed over time, but blockchain enabled asset owners to scrap old, incremental, haphazard security protocols. As an encrypted digital database (often called a distributed ledger) shared by different parties within a decentralized network, blockchain provides total transparency and virtually hack-free security in this way:
• All transactions are transmitted to a global network of peer-to-peer computers for validation
• Once validated, transactions are “chained” together – each with a cryptographic signature called a “hash”
• These blocks of data record permanent transaction history and require 51% of network computers to agree to any alteration.
Benefits for NFT Owners
Read more from Built on Blockchain series:
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Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. The Fund is subject to management risk because it is actively managed. Narrowly focused investments typically exhibit higher volatility. A portfolio concentrated in a single industry, such as companies actively engaged in blockchain technology, makes it vulnerable to factors affecting the companies. The Fund may face more risks than if it were diversified broadly over numerous industries or sectors. Blockchain technology may never develop optimized transactional processes that lead to realized economic returns for any company in which the Fund invests.
The Fund will invest at least 80% of the Fund’s net assets in equity securities of companies actively involved in the development and utilization of blockchain technologies. Such investments may be subject to the following risks: the technology is new and many of its uses may be untested; theft, loss or destruction; competing platforms and technologies; cybersecurity incidents; developmental risk; lack of liquid markets; possible manipulation of blockchain based assets; lack of regulation; third party product defects or vulnerabilities; reliance on the Internet; and line of business risk. The investable universe may include companies that partner with or invest in other companies that are engaged in transformational data sharing or companies that participate in blockchain industry consortiums. The Fund will invest in the securities of foreign companies. Securities issued by foreign companies present risks beyond those of securities of U.S. issuers.
Amplify Investments LLC is the Investment Adviser to the Fund, and Toroso Investments, LLC serves as the Investment Sub- Adviser.
Amplify ETFs are distributed by Foreside Fund Services, LLC.
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